Today’s Blog – Wednesday 2nd September 2015

The dead cat bounce flagged yesterday is now in the down-wards phase – as oil prices fell a significant ~8% over-night.

The “numbers” that drove the fall were primarily Chinese rather than from the usual US sources. This was a poor PMI (purchase managers’ index) number that affected general asset markets (e.g. the ASX and then other stock markets around the world).

The PMI is one of the more trusted PRC “numbers” – and continues to put official more bullish GDP growth figures into question.

Commodity prices

Brent closed down to US$48.51 and WTI to US$44.19.

In addition to the Chinese influence, negative US numbers from Tuesday’s weekly private sector survey of expected crude inventory numbers were also poor. The official EIA figure, due Wednesday US time, will likely be the key driver of overnight trading.

On the “events” side of the market, it appears to be increasingly likely that Obama has procured the necessary Democratic Senate votes he needs to ensure the Iranian nuclear deal is not blocked by Congress. The Iranians on the one hand are talking up how they can quickly bring on 1 mmbopd – whilst on the other hand recently advising that very little investment had been made in its oil sector in recent years. The official Iranian line appears to be highly optimistic.

Oil markets are clearly very skittish at present, both up and down.

Henry Hub was flat at US$2.69. Global weather experts seem to be building an increased consensus that later this year the Pacific could see a very large El Nino affect. The consequences of that for US gas prices would likely be negative – as an El Nino should lead to milder US winters (as well as droughts in Australia).

LNG

The massive ENI gas discovery off-shore Egypt continues to garner global attention. The Egyptian authorities have now said that they intend for the gas (say 20 TCF recoverable from the 30 TCF gas-in-place – but with a yet to be tested deeper formation giving further upside) to be reserved for domestic use. That is understandable – notwithstanding the likely commercial preference of ENI to use under-utilised liquefaction facilities in the country.

Israel, generally the best governed country in the region (not a high bar, though), has not been particularly efficient in the regulation of its off-shore gas discoveries, which have languished somewhat. Perhaps the Egyptian find will spur it to make quicker decisions to capture finite gas markets.

That could prod Australia’s Woodside Petroleum Ltd (WPL) to dust-off its previous plans to get involved in Mediterranean LNG in Israel. The Australian today reported that WPL was keen to expand in East African LNG and it is emotionally hard to go back to a previously aborted deal. However, in my view, gas markets in the Mediterranean are likely to be better than those in the Indian Ocean (and Israel a lower sovereign risk than Mozambique).

Governments and fracking

The Canadian press has followed up on the recent news about seismic activity in British Columbia apparently being caused by fracking. Its reports have quoted industry identity David Hughes as saying that if the BC Government got the size of LNG industry it was aiming for (my view – a big if), then it was inevitable that more drilling/fracking would be required and hence there would be a greater risk of seismic activity. Mr Hughes characterised this “its just the cost of doing business” – which is a fair call, but usually a great un-mentionable in the industry.

Company news – Armour Energy Ltd (AJQ) and Origin Energy Ltd (ORG)

Following up yesterday’s take-over news for ASX listed minnow AJQ, the company has announced today that is has done a deal with ORG to acquire the latter’s collection of various small assets in Queensland’s Roma Shelf area, for A$10M.

Whether this will be a poison pill that will deter predator Westside Corporation remains to be seen. AJQ’s share price has been bid up above the offer price.

ORG seems to be proceeding apace with the disposal of non-core assets. In addition to the AJQ deal, last week AIM listed Mosman Oil and Gas announced that it had struck a deal with ORG to acquire a late life small on-shore asset on the North Island of New Zealand for NZ$10M.

I expect ORG to also target further sales, not necessarily to raise much cash, but to demonstrate portfolio discipline to the market. Its other assets in New Zealand (primarily the Kupe gas-field) and possibly the Perth Basin (although an ALP policy of a fracking “moratorium” does not help that) could be on the for-sale list.

Company news – Santos Ltd (STO)

The Australian has today reported on rumours that STO is making progress on a recapitaliastion, with A$750M of promised support from key fund managers to form a cornerstone for a much larger raising (likely though a rights issue). The very volatile oil price at present no doubt does not make it easy to lock in this type of deal.

Company news – Roc Oil Ltd (ROC)

Ex-ASX-listed company ROC (now owned by China’s Fosun Group) has just sold its North Sea assets to AIM listed Faroe Petroleum for US$17M. This presumably reflects a strategy of focusing on Australia and South-East Asia.

Quote of the day

Following yesterday’s quote, readers of this blog are no doubt clamouring for further inspiration from Danish philosopher Kierkegaard – and the following gloomy pronouncement suits those following the oil market at present: